Teaching Money Management: Using Envelope Budgeting (Part 5)

Your grown child has a solid full-time job, a college education (without any outstanding loans), and easily supports his wife and children while living frugally, yet comfortably. He owns two cars, both of which are paid off, and he owns his own home, which is also completely paid for. Because he does not have any debt, any money that does not go directly to expenses is put into savings. He already has a sizeable retirement, and has money in the bank for the college education of his two children. In addition to these accomplishments, your child takes his family on a special vacation each summer.

Sound like a pipe dream? It’s not, for children of families that prepare them well for managing their money effectively. Part 1 of this series demonstrated how teaching children to give, save, and then keep money establishes healthy fiscal responsibility. Part 2 provided a specific plan to help children earn money by working, and Part 3 focused on the importance of using cash rather than credit or debit. Part 4 addressed the importance of not borrowing, and starting with what you have rather than with what you want. All of these principles are critical aspects that homeschoolers must incorporate into their children’s learning, for kids to grow up with a sense of responsibility, self-discipline, and the skills to manage finances effectively.

But it doesn’t stop there. Although the last article examined the fact that borrowing money leads to overspending and poor financial health, it is natural to ask the question, “Just how, then, does one purchase items for which he/she does not have the money?” The answer to that question ties in closely with principles addressed in Part 4: 1) Children must learn to delay gratification and 2) Children must be taught to live within their means. When borrowing to purchase an item is not an option, parents can teach children another method to getting what they want, an approach often referred to as “the envelope system”.

The envelope system entails putting aside cash into different envelopes earmarked for specific purposes. If the cash amounts become very large, the money can be transferred into a savings account (as long as the money can be kept separate and earmarked for specific purposes). Rather than purchasing an expensive item for which the child does not have the money, and then paying interest every month in the effort of paying it off, the child lives without the item, while putting money away each month toward buying it. It is the idea of “paying yourself”. All of the money that would have gone toward interest instead goes toward more purchasing power.

For example, there might be a “car” envelope in which the child puts money every month toward purchasing a car of his/her choice. Rather than borrowing money and purchasing a car (at a payment of, say, $250/month), the child borrows Mom or Dad’s car to get to work, (or takes the bus, or carpools) and instead pays himself by putting that $250 he would have spent on a car payment into the “car” envelope each month, until he has the needed amount to afford the car he desires. He learns responsibility and the value of money by working hard to earn his car, and he learns the character quality of delaying gratification by having to look forward to using his purchase once he can truly afford it. In addition, he avoids accumulating any debt, and understands frugality in purchase choices (since he is much more likely to choose a modestly priced car when saving up for it than if he were to borrow money to purchase it). As an additional benefit to this system, the child will likely be able to get a much better deal on whatever car he eventually purchases, since paying with cash puts him into a much stronger bargaining position than financing the vehicle. No, the child will likely not be driving a brand new luxury vehicle with bells and whistles. But he will learn how to live within his means, put aside his immediate desires for his long-term benefit, and make choices that will positively impact both his character and financial well-being for the future.

The envelope system can be used for many different things. For example, even after the child purchases the car, it would behoove him to keep putting money into the “car” envelope in order to handle maintenance expenses, repairs, or to simply move up to a better car in the future. Children can maintain a “trip” envelope to save up for a special spring break vacation or trip overseas they have always wanted to take. Most importantly, the child who is living on his/her own should have an “emergency fund” envelope of at least $1,000 to serve as a safety net to handle the inevitable “things that come up”. If the child is living according to the Give, Save, Keep approach, then immediately once she is paid, after she gives away the first portion of her money, the next portion is put into the appropriate envelopes as part of her saving plan.

The envelope system is a great way for children to be intentional about where their money goes, so that they manage their money rather than their money managing them. It is difficult to give up short term desires for long term gain, but doing so can make the difference between an adult who spends the rest of his life enslaved toward the efforts of paying off debt he can never fulfill, or one who lives in peaceful comfort and abundance, with the freedom to do or spend as he chooses. Doing so helps the scenario at the beginning of this article become a reality. This system teaches children the character qualities of responsibility and frugality, and helps them to live a debt-free life based on what they can actually afford rather than what they want. Homeschoolers have a unique opportunity to give children financial management skills that will shape the direction of their future; to provide them the character and competence to put money in its proper place and to build a life of financial peace and security.

Rebecca Capuano is the stay-at-home mom of three children (one of whom is in heaven) who also makes attempts at being a homeschooler, writer, photographer, scrapbooker, and truth-seeker. She earned her Master of Social Work degree from East Carolina University, and has worked in a variety of capacities (including group homes, day treatment centers, and public schools) with at-risk children and staff, including developing a therapeutic and educational day treatment center for delinquent youth in Wilmington, North Carolina. She currently resides in Virginia, and has written on a variety of topics for both Examiner.com and Home Educators Association of Virginia. Rebecca believes that family is created by God as the most fundamental institution in society, and she is dedicated to helping families nurture their children to become responsible persons of character and integrity. In addition to reading her posts at TheHomeSchoolMom, you can follow her search for truth (and blunders along the way) in family, faith and culture by visiting her blog, seeluminosity.com.

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